How Are Closing Costs Calculated?

Closing costs are the final hurdle before you get the keys to your new home. These fees cover a range of expenses tied to processing and finalizing your mortgage. While they may seem like a small detail, closing costs can significantly impact your homebuying budget. It’s an important part of shopping for a mortgage to understand how closing costs are calculated.

Understanding how closing costs are calculated gives you more control during the homebuying process. These costs vary based on your loan type, your state or county, and the lender you choose. With the right knowledge, you can avoid surprises at the closing table and even reduce some of these fees.

What Are Closing Costs?

Closing costs are a bundle of fees and charges due at the end of a real estate transaction. They typically cover the services required to originate, process, and finalize a mortgage loan.

These costs generally fall into three categories:

• Lender Fees (origination, underwriting)
• Third-Party Fees (appraisal, title, escrow)
• Prepaid Costs (taxes, insurance, interest)

Here are some common closing cost fees:

• Loan Origination Fee
• Appraisal Fee
• Credit Report Fee
• Title Insurance
• Escrow Fees
• Recording Fees
• Prepaid Interest
• Homeowners Insurance Premium
• Prorated Property Taxes

Average Closing Cost Range

On average, closing costs range from 1% to 5% of the total loan amount. For example, on a $400,000 loan, you might pay anywhere between $4,000 and $20,000 at closing.

However, in Arizona, these costs usually fall on the lower end of that range. Most buyers or homeowners pay between 2% and 3% of the loan amount. This wide variation exists partly because borrowers can choose to “buy down” their interest rate more aggressively. Additionally, differing credit profiles and lender policies can significantly affect the final cost.

When it comes to refinancing, closing costs are often slightly lower. In particular, refinance programs like FHA Streamline and VA IRRRL may reduce or even eliminate certain fees, depending on the loan structure.

Key Components That Make Up Closing Costs

Here are the major fees often included in your final closing cost total:

How Lenders Calculate Closing Costs

Lenders are required to provide two key documents:

• Loan Estimate (LE): Given within 3 business days of application. It outlines estimated closing costs.
• Closing Disclosure (CD): Given at least 3 business days before closing. It lists final costs.

These forms break down all costs line by line. Once you receive a Loan Estimate, you can compare offers between lenders.

Estimating Your Own Fees

You can estimate your closing costs using a simple formula:

Loan Amount x Estimated Percentage (1% to 5%) = Estimated Closing Costs

Example:

For a $300,000 mortgage at 3% estimated costs: $300,000 x 0.03 = $9,000 in closing costs

To get more accurate numbers, use an online closing cost calculator. Input your state, loan amount, and property details for tailored estimates.

Can You Negotiate or Reduce Out of Pocket Expense?

Yes, you can negotiate certain fees. Here’s how:

• Shop lenders: Compare origination and underwriting fees.
• Request lender credits: Some lenders may offset costs in exchange for a slightly higher interest rate.
• Ask for seller concessions: Sellers can offer credits toward your closing costs as part of the purchase agreement.
• Use third-party service providers: Certain third party fees like title can be chosen by you.
• Consider no-closing-cost mortgages: These loans roll fees into your loan amount or exchange them for a higher rate.

Closing Costs for Refinancing

Although refinance closing costs typically mirror purchase costs, they may sometimes exclude certain fees, such as title insurance or an appraisal, if waived.

Programs like FHA Streamline Refinance and VA IRRRL (Interest Rate Reduction Refinance Loan) offer reduced paperwork and lower out-of-pocket costs. In some cases, these can even be completed with no upfront costs.

At Agave Home Loans, we always put our clients first. We take the time to understand your unique needs so we can find the perfect mortgage solution for you. If you’d like to learn more or obtain a quote on a home loan, contact us today!